Dollar Consolidates Gains after Yellen Lays an Egg

by Marc Chandler

The US dollar is consolidating yesterday's dramatic gains against the major foreign currencies. Prior to the outcome of the FOMC meeting, we had accepted that even as Fed shifted from a threshold approach to forward guidance to a more qualitative approach, the goal of the new chair would be to underscore continuity.

The way we suggested Yellen's performance could be evaluated was by having little change in market expectations for the first rate hike, which previously was in late Q3 or Q4, depending on the instrument one looked at and the interpolation. By that measure, yesterday was a flop.

To be sure, Yellen emphasized that there was no change in the FOMC's policy intentions. Nevertheless, the take away was that the FOMC was more hawkish than expected. The market focused on two elements.

First, Fed funds at the end of next year are now seen at 1.0%, up from 0.75% in December 2013, when the last projections were made. Just as importantly, at the end of 2016, Fed funds are seen 2.25%, up from 1.75%.

Second, the FOMC said that there would be a "considerable period" between the completion of the asset purchases and the first increase in rates. We would file this phraseology under "strategic ambiguity". However, when pressed, Yellen opined that a "considerable period" could be around six months.

Participants quickly did the math. It anticipates the FOMC completing the asset purchases in October. Yellen's clarification/expansion points to a hike as early as Q2 15. It would not be surprising if in subsequent commentary, the Fed's leadership tries to backtrack from those implications. We expect the first hike to be in late Q3 or Q4 2015.

However, it may be hard to put the proverbial toothpaste back in the tube, especially if the economic data bounces back as the weather impact fades. Moreover, there may be more last ing damage to the Fed's credibility. Under Bernanke, the Fed had developed another tool to help manage expectations. It was individual (but not by name) forecasts for GDP, core inflation, unemployment and anticipated Fed funds rate. Yellen attempted to play down the hawkish results of what she called the "dot plot".

Recall our reservations. We had argued that if Obama and Bernanke wanted to ensure Yellen was a weak leader they would 1) make it clear she was not the first choice; 2) have Bernanke announce the tapering and exit strategy from QE; 3) name a vice chairman who is bound to overshadow her; and 4) have Bernanke stay until the very end, although Yellen was confirmed in early January. Of course, they did precisely this and it serves as a backdrop for yesterday's debacle.

We also recognized that despite some perceptions to the contrary, Yellen is not really the super-dove as she is often portrayed. We perceive her as an independent and pragmatic leader. We also recognized that the Fed presidents rotating to voting positions on the FOMC cast it in a somewhat more hawkish direction. That said, we suspect when the new nominees are confirmed, the next forecasts (June) will include soften yesterday's apparent signal.

In addition to the FOMC, developments in China remain a major focus for the markets. For the second consecutive session dollar rose more than 1% above the PBOC's yuan fix. The greenback traded a little above CNY6.23, for a new 12-month high. While some observers have placed a greater deal of emphasis on the CNY6.20 level as triggering large scale losses on highly leverage investment instruments, our understanding is that it is more dynamic and the pressure has been increasing since CNY6.15.

While some US/Europe-based hedge funds are thought to be involved, our understanding is that these positions are primarily held by domestic investors, not foreign. If Chinese officials wanted to continue to wash out the speculative positioning and moral hazard, we suspect that the dollar needs to rise through CNY6.30.

Many economists have revised down their GDP forecasts for the world's second largest economy. The mettle of Chinese officials and the extent of their willingness to emphasize the quality of growth rather than the quantity are being tested and they appeared to have blinked. Chinese officials announced they would expedite construction and infrastructure projects that had already been approved.

Given the restrictions on foreign investors’ access to mainland equities (A-shares), many take exposure through the Hong Kong Enterprise Index (H-shares), which tracks Chinese companies trading in Hong Kong. With today’s 1.7% decline, the index has now surpassed a 20% decline from last December's high. While some argue this is a sign of a bear market, we note that the real high was recorded not in late 2013, but back in late 2010. Even with the latest declines, this index is still about 6.4% above last year's lows. We cite this not a as a bullish sign, but simply to put the recent losses in perspective.

The rise in US yields weighed helped lift the dollar against the yen. The weaker yen did not spill over and help the Nikkei, as appears to be often the case. The Nikkei fell 1.7%. The dollar faces technical resistance in the JPY102.50-80 area.

While the dollar is consolidating yesterday's gains against the yen, it is extending its gains against the euro in the European morning. The euro is falling through its 20-day moving average (~$1.3815) and slipped through the $1.3800 level. This was the top of the 5-cent, 5-month trading range that was broken when the ECB refused to adjust policy earlier this month.

The Draghi-rally began in the $1.3730-50 area and this would be a test of the resolve of the euro bulls. The retracement objectives of the euro's rally off the year's low (Feb 3 ~$1.3477) are found near $1.3780 and then $1.3720.

The US reports weekly initial jobless claims, the March Philadelphia Fed survey and Feb existing home sales. Of the three, we suspect the Philly Fed survey is the most important for market psychology. An improvement here would, like the Empire State survey, strengthen ideas that the weather was an important, even if not only, economic headwind at the start of the year.

Also, with the money supply figures after the markets close, the Fed will also report on its custody holdings. Recall last week, on a Wednesday-to-Wednesday basis (as opposed to a weekly average) the Fed's custody holdings of Treasuries for foreign central banks fell by about $105 bln. This outsized drop, a record, still appears to have been a shift away from the Fed's custody services, but probably not a sale.

The Canadian dollar is the weakest of the majors over the past five sessions, losing about a 1.6% against the greenback and is at new 4.5 year highs. The seemingly hawkishness of the Fed and the seemingly dovishness of the Bank of Canada has taken a toll. On Friday, Canada reports retail sales and CPI figures. We had expected the Canadian dollar to sell off in response to what is anticipated to be soft inflation figures, which the central bank is particularly sensitive to. However, there is risk of sell the rumor and buy the fact type of activity. That said, previous resistance (~CAD1.12) now may act as support.

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The Epochal Error of Modern Central Banking

by David Stockman

David Stockman, Director of the Office of Management and Budget under Reagan, former Congressman, and author of the new bestseller The Great Deformation: The Corruption of Capitalism in America, discusses his new book, the gold standard, bailouts, and the problems the American economy faces today.

Mises Institute: In the book, you oppose Bernanke’s view of the Great Depression, which you point out relies heavily on the views of Milton Friedman.

David Stockman: Bernanke has cultivated this idea that he is a brilliant scholar of The Great Depression, but that’s not true at all. What Bernanke did was basically copy Milton Friedman’s misguided and very damaging theory that the Federal Reserve didn’t expand its balance sheet fast enough by massive open market purchases of government debt during the Great Depression. Bernanke therefore claimed that monetary stringency deepened and lengthened the depression, but in fact interest rates plummeted during the crucial 1930-1933 period: credit contracted due to genuine and widespread insolvencies in the agricultural districts and industrial boom towns, causing bank deposits to shrink as a passive consequence. So Bernanke had cause and effect upside down — a historical error that he replicated with reckless abandon in response to the bursting of the housing and credit bubble in 2008.

Friedman’s error about the great depression led him, albeit inadvertently, into the deep waters of statism. He claimed to be the tribune of free markets, but in urging Nixon to scrap the Bretton Woods gold standard he inaugurated the present era of fiat central banking. He held that the central banking branch of the state could improve upon the performance of the free market by targeting the correct level of M1 (money supply) and thereby ensure optimum performance of aggregate demand, real GDP, and inflation. That’s Keynesianism through the monetary control dials, and has led to outright monetary central planning under Greenspan, Bernanke, and most of the other central banks of the world today.

MI: You blame many of our current woes on the movement away from monetary and fiscal discipline started decades ago. Yet, why did it take so long for the U.S. economy to get into the deep trouble we’re in today? Have things gotten worse in recent years?

DS: Although central banking does cause moral hazards and lends itself to abuses, there have been periods in which monetary and fiscal discipline have been employed. Fed Chairman William McChesney Martin, for example, really did take the punch bowl away when the party got started because he took monetary discipline seriously. Fiscal discipline under Eisenhower and the gold standard behind Bretton Woods helped put off the day of reckoning for quite a long time. But fiscal discipline went out the window with Lyndon Johnson and Richard Nixon, and the elimination of the weak gold standard behind Bretton Woods certainly didn’t help. The deficit spending of the Reagan years made things even worse.

The Greenspan and Bernanke years then opened the door the massive abuse of the system we see today. Greenspan took the Federal Reserve, which for years had been run by far more cautious and conservative men, and turned it into a machine for fine-tuning every aspect of the economy. Bernanke has continued this, and taken it even further.

MI: Among many conservatives and Republicans, it is often claimed that the Reagan years were a victory for free markets and that the 1990s vindicated this strategy. Is this the case?

DS: In the early days of the Reagan years I thought, with many others, that the Reagan Revolution would in fact lead to smaller government. I turned out to be wrong, and politics overwhelmed any commitment Reagan had to making government smaller. The reality was huge growth in the deficit, more government spending, and the laying of the groundwork for the huge debt-based problems we have today.

During the Reagan years and since, the GOP has made peace with tinkering with the economy through the central bank, and joined the Democrats in wanting to gin up so-called aggregate demand and stimulate growth. Dick Cheney declared that deficits don’t matter, and the Republicans abandoned any serious commitment to taking a true hands-off approach to the economy.

In spite of this, the perception remains that the Reagan years were a period of laissez-faire, and this in turn has led to the myth that the fiscal indiscipline of the 1980s led to the boom of the nineties. In reality, the 1990s were a period of monetary profligacy, with a big expansion in the money supply under Greenspan, and a real acceleration in the Fed’s drive to manipulate economic growth and employment from the Fed. This in turn led to the dot-com bubble which burst in 2000-2001.

MI: We’ve been told that deregulation of the financial sector caused the 2008 crisis, and that a lack of regulation allows the “One Percent” to prosper while the “99 Percent” suffers.

DS: Fundamentally, the financial crisis was a product of the Fed’s repeated blowing up of bubbles, and not of deregulation. Moreover, any suffering inflicted on the 99 Percent by our system doesn’t come from the free market, it comes from the crony capitalism that is now our economic system. The Blackberry Panic of September 2008, in which Washington policy makers led by former Goldman Sachs CEO Hank Paulson, panicked as they saw Wall Street stock prices plummet on their mobile devices, had very little to do with the Main Street economy in the United States. The panic and bailouts that followed were really about protecting the bonuses and incomes of very wealthy and politically well-connected managers at banks and other heavily leveraged businesses that were eventually deemed too big to fail. What followed was a massive transfer of wealth from the taxpayers and middle-class savers, in the form of bailouts and zero interest rates on bank deposits imposed by the Fed, to the so-called One Percent.

As I show in my book, none of this was necessary to save the larger economy, since the losses that would have taken place as a result of the collapse would have been largely limited to Wall Street. What the bailouts did was preserve the wealth of wealthy and powerful Wall Street players. Meanwhile, we’ve seen no real economic recovery in the rest of the economy.

This transfer of wealth continues, by the way, in the form of relentlessly low interest rates, and an ongoing war by the Fed on safe and stable investment tools such as savings accounts and low-risk bonds. Indeed, this is a deliberate policy to get people away from these safer investments, and to get them investing in more volatile and higher yield investments. The idea is that the Fed can somehow force bigger returns on these riskier investments, and this will lead to a wealth effect. People will then think they’re richer, and we can then spend ourselves into a recovery. This is a terrible doctrine, but that’s what rules Washington right now. It actively works against middle-class people who want to work and save and invest their money responsibly and conservatively.

MI: It seems that the Fed today tries to manage everything from growth to employment to the mortgage rate. Has this always been the case?

DS: The Greenspan-Bernanke Fed has become a tool for central planning and manipulation of the economy, but it hasn’t always been that way. One way to reverse this dangerous and unstable deformation of policy would be to return to the vision of Carter Glass, and employ the Fed as a “banker’s bank.” In such a situation, the Fed takes its cues from the market. The market sets prices (i.e., interest rates on money and debt), and the Fed only provides additional liquidity, in exchange for sound collateral, at a penalty rate, when the banks needed liquidity.

The system we have now is one in which the Fed decides, through a Politburo of planners sitting in Washington, how much liquidity is necessary, what the interest rate should be, what the unemployment rate should be, and what economic growth should be.

There is no honest pricing left at all anywhere in the world because central banks everywhere manipulate and rig the price of all financial assets. We can’t even analyze the economy in the traditional sense anymore because so much of it depends not on market forces, but on the whims of people at the Fed.

MI: Is there any way to fix things before a major crisis comes?

DS: You’re not going to have legislation to change the mandate of the Fed, and I don’t see how you’ll get new people on the Fed who think differently from the current group. Even if you get rid of Bernanke, then you just get Janet Yellen. I just don’t see the political will right now to make any great reforms or cut spending significantly.

I think the political realities of the situation make the most likely scenario one in which there will be some kind of real financial collapse and disorder that will require a total reconstruction of the system. It’s impossible to say how that will be done, and this may be the chance to go back to a gold standard or to a very sharply circumscribed remit for central banks.

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FOMC and More

by Marc Chandler

The main interest today is the FOMC meeting.   There are four elements of today's decision.   First, is the statement itself. It will likely recognize that the economy has slowed and that temporary factors were the main culprit.  This signals confidence that the economic expansion continues.

Second, is the decision to continue to taper at a measured pace. In practice, this means $10 bln a meeting and being able to stop the purchases altogether before the end of the year.

Third, Fed officials will update their GDP, unemployment and core PCE forecasts.  The new appointees have not taken office yet, so the only difference is the absence of Bernanke's forecasts.  There may be a small downward revision in this year's forecast of 2.8%-3.2% GDP, reflecting what has already transpired.  A change in the 2015  or 2016 forecasts would be more significant.

These points as not very controversial, and if the FOMC were limited to these, we would likely regard the meeting as a non-event for the markets. However, the Fed's challenge lies in the fourth element. The new chair will have a press conference in which she explain the evolution of forward guidance, away from the quantitative threshold approach toward what has been called a qualitative approach. 

This has largely been telegraphed already in other Fed official speeches. The point of all this is to help reassure (both domestic and foreign) stakeholders that it does not intend on raising rates for some time. The collective judgement of the market is that "some time" is more than a year off.   Yellen's success might be measured by how little these expectations change.
The euro has traded above the $1.39 level on an intra-day basis for the sixth consecutive session. While many are looking for a push above $1.40, a failure to do so today after the FOMC meeting could be frustrating for the bulls, but to really inflict any pain the euro has to be pushed through the $1.3840 near-term base built and, probably, through the $1.3800 level that marks the top of the previous 5-cent 5-month trading range.
Against the yen, the dollar is stuck in the same narrow trading range as it has been for the previous three sessions.  JPY101.20 marks the downside and JPY102 marks the upside, though the greenback has not been above JPY101.70 today.  Japan reported a sharp improvement in its trade balance.  The February shortfall was just above JPY800 bln after the lunar new year distorted record deficit in January of JPY2.792 trillion.  However, even this was about JPY200 bln larger than expected. Nevertheless, the trade shortfall is likely to be offset in full by the investment income surplus and suggests the February current account balance will be positive.
Export growth improved from the 9.5% (year-over-year) in January to 9.8%.  The consensus expected closer to a 12.5% rise in exports.  The improvement in the trade balance was more a result of the dramatic slowing in imports.  Imports rose 9.2% in February after a 25% increase in January.  The consensus was for a 7.2% increase.   A review of the quantities of imports and exports suggests the deterioration of Japan's balance is largely a function of a weak yen, which has boost roughly the same quantity of energy over the past year.  Price adjustment also appear to overwhelm quantity changes with exports.
The Asian session continues though to be focused on China.  The dollar moved above the CNY6.20 level on an intra-day basis for the first time since last April.  It moved a little more than 1% from the CNY6.1351 fix. The band was widened to 2% last weekend.   Given that the volatility has continued to increase this week, after the widening of the band, that the two developments are different.  The increased volatility of the yuan is to continued to press the unwind of the accumulation of speculative positions rather than simply prepare the market for the wider band as some have suggested.    The wider yuan band allows the increased volatility to be sustained, but is also desired in its own right.
Russia moved to annex Crimea following the weekend referendum.  The results of that referendum, we note, were nearly identical with the referendum in January 1991.  The US and EU see the annexation of Crimea as a sign of escalation, or at least the refusal of Russia to deescalate the situation and therefore are preparing another round of sanctions.  The EU heads of state will meet tomorrow.  Of course, the pain of implementing sanctions on Russia are not shared equally by the EU members and the fissures are evident.  The US has called for an emergency G7 meeting March 24-25.  Despite the hand wringing and finger pointing, the sanctions being implemented now are already more than what was adopted after Russia occupied (and still does) Georgian territory in 2008.
Yesterday Russia cancelled its sixth bond auction due to market conditions.   Projections suggest Russia could theoretically cancel all the Q2 auctions and still not have much strain.  Today's Russia's 10-year bond yield is 10 bp lower to about 9.08%.  The ruble is extending its recovery.  The dollar is below the 20-day moving average against the rouble (~RUB36.15) for the first time this year.  The MICEX is off about 1% after initially extending yesterday's gains.
The main economic developments from Europe today come from the UK.  The minutes from the MPC meeting earlier this month do not appear to contain much the way of surprises.  As hinted by recent official comments, there is much discussion about the extent of spare economic capacity and the role of sterling.  However, there is no sign that Carney is losing in his effort to resist rate hikes this year.
Meanwhile, the UK labor market continues to strengthen.  The claimant count fell by another 34.6k people. The consensus expected a decline of 25k.  The January series was revised to show almost 34k fewer people filing unemployment claims rather than 27.6k in the initial estimate.  The ILO unemployment measure was unchanged at 7.2%.  Of note average earnings, with an additional month lag rose 1.4% in January from a revised 1.2% in December.  Wages in both the US and UK have begun picking up.  The markets have yet to focus on this, but we suspect that it will become a more important story as the year progresses.
In the UK afternoon and the US morning, UK's budget will be presented.  The market expects upward revisions to growth, which will project a smaller deficit.  This in turn may allow the UK to issue less debt. This is also the budget that will help influence the economic conditions ahead of next year's election.
Sterling itself has been uninspired.  It is firmer on the day, but continues to straddle the $1.6600 area. That level seems to be about the middle of the range.  The cross against the euro may be more interesting. The euro is turning back from testing the GBP0.8400 and a move below the GBP0.8340-60 band would likely signal additional near-term euro losses/sterling gains.
The Canadian dollar is seeing yesterday's losses extended.  The CAD1.12 area is back in view after seeing CAD1.1025 yesterday.   We think the market misunderstood Governor Poloz comments yesterday.  He was not signaling a rate cut simply because he could not rule it out in a philosophic sense that a significant change in economic conditions could force its hand.  That said, Friday's inflation report is expected to show another decline in CPI, which the Bank has been placing more emphasis.  Separately, we note that Finance Minister Flaherty has resigned over a domestic policy dispute with Prime Minister Harper. The National Resources Minister, Oliver will reportedly be Flaherty's successor.

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The March FOMC Decision

by Pater Tenebrarum

Convoluted Statement Becomes More So

As always, Kremlinologists can check the WSJ's trusty FOMC statement tracker to see what has actually changed. Ever since the first 'taper' announcement in December, the statement has become a lot more convoluted. As far as we can tell, the reason for this is that there is a plan underway to slowly replace actual money printing with something called 'forward guidance'. This consists of promises about the future conduct of policy that are worth precisely nothing, since the Fed can definitely not see the future. Not only are there no trained fortune tellers in its employ, but what insights into the future state of the economy it tends to offer have a well-worn record of being worse than a coin flip, especially near economic turning points.

This is not necessarily a complaint, mind. One cannot fault people for their inability to correctly anticipate the future, least of all bureaucrats. If they were able to make correct forecasts, they wouldn't be bureaucrats, but businessmen or speculators.  In that sense, 'forward guidance' is a waste of ink. In fact, the statement itself indicates as much:

“In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including  measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

(emphasis added)

Incidentally, the above excerpt used to include the 6.5% unemployment threshold, which has now been removed  – in other words,  from 'fixed targets' it's now back to 'we'll make it up as we go along'. Of course neither one nor the other is going to improve the insight of the central planners regarding the 'correct' height of interest rates.

The sentences highlighted above meanwhile show that the whole 'forward guidance' spiel is really useless, as it requires generous garnishing with so many qualifiers that it would be just as well not to say anything at all.

The only really important information was actually that the 'tapering' of 'QE 3' will continue. The monthly pace of debt monetization will thus decline by $10 billion to $55 billion ($25 bn. MBS, $30 bn. treasuries).

Interestingly, Narayana Kocherlakota dissented because he thought the 5^th paragraph of the statement didn't make sufficiently clear that the Fed is committed to increasing the 'rate of inflation' to its nonsensical 'target' of 2% (allegedly, 'inflation' is currently 'too low').

Markets Balk

Later, Ms. Yellen gave her first press conference and promptly managed to 'disappoint' the boys on Wall Street by saying something that was not deliberately shrouded in obfuscatory language.

According to Bloomberg/Business Week, she committed the unforgivable  'rookie mistake' of 'speaking too clearly':

“At her first press conference  since becoming Fed chair in February, Yellen was asked what the Fed meant by “a considerable time.” The correct answer to this question is, “We weren’t specific for a reason. Go away.” Yellen, having been connected with the Fed in one capacity or another for most of the past 20 years, should have known that. Instead, she said, “You know, this is the kind of term it’s hard to define, but, you know, it probably means something on the order of around six months or that type of thing.” That was a bit quicker than markets had been expecting, so interest rates rose and stocks fell .

The comment “sent equity markets into something of a tailspin,” wrote Paul Ashworth of Capital Economics. Michael Wallace of Action Economics in Colorado called Yellen’s specificity a “gaffe.” He wrote that Yellen made “the mistake of ‘taking the bait’ and providing a time reference for the purposefully ambiguous phrase.” It wasn’t the only factor in the market sell-off today—new economic projections by members of the FOMC were also a factor—but it did make a difference.”

(emphasis added)

How dare she not stay mysterious and inscrutable? Where are we going to end up if the price fixers at the Fed begin to give concrete answers to concrete questions? What a calamity!

The incident is in a sense revealing with respect to the absurdity of the rituals surrounding what it is in the end not much more than a pretty straightforward wealth redistribution (a.k.a. 'theft') and bubble-blowing operation. An operation that is different from the coin clipping of kings of yore only in terms of its arrogant pretenses to being 'scientific'.

Interestingly, apart from the US dollar, no market liked the statement or the press conference. In other words, markets saw the action as 'hawkish', whatever that means in light of $55 bn. of ongoing debt monetization and an overnight lending rate of zilch. However, things are of course relative – once an asset and credit bubble has been blown up to such astounding proportions as the current one, all it takes to upset it is a sufficient slowdown in monetary expansion, so in that sense market participants were probably correct in being displeased (more on this further below).

Gold continued its recent decline, but as this article at Zerohedge points out,  that is actually quite normal during FOMC week. Treasury bonds and stocks sold off as well.

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Gold (April future, 30 min. candles) continued its recent correction on FOMC day. Note that the metal is now approaching an important area of support that should ideally hold to keep this year's bullish tone intact. The weak seasonal period is beginning and it will be interesting to see how the gold market handles it (seasonal tendencies didn't mean much in the past three years or so) – click to enlarge.

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10 year treasury note yield, 10 min. chart.  A pretty strong move in yields for one day – click to enlarge.

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SPX, 10 min. chart. The stock market disliked the statement as well, although it  probably remains the most bullet-proof market for now relatively speaking – click to enlarge.

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US dollar index, 30 min. chart: the one and only market that actually liked the FOMC song and dance on Wednesday – click to enlarge.

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Money Supply

Due to the ongoing, if somewhat slower, debt monetization program, the monetary base continues to increase. However, the broad money supply TMS-2 actually suffered a rare decline in January (the most recent period for which the data are available), falling from $9.978 trillion to $9.972 trillion, i.e., a decline of a little over  $6 billion. What precisely was to blame for that we are not certain, but one guess is that European banks are busy shifting funds around.

The recently published quarterly BIS report included a chapter dealing with deposit fund flows from euro area banks the US branches of which hold large excess reserves with the Fed. Some of these flows were tied to a risk-free carry trade by banks not subject to FDIC fees by using reserves, on which the Fed pays 25 bps interest. Apparently some of the associated flows are about to reverse with the increased employment of reverse repos by the Fed. In the course of the euro area debt crisis, we have already seen that dollar flows from and to Europe can have a fairly large effect on US domestic money supply growth. Dollar deposits held in offshore accounts won't show up in the domestic data, and given continued QE and positive loan growth in the US, a decline in the broad money supply can only mean that some money has actually flown out. Note also that there may be seasonal effects at work – in any event, one month is not necessarily meaningful in this context.

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The US monetary base continues to grow in line with 'QE' debt monetization – click to enlarge.

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Broad US money supply TMS-2 has slightly declined in January – click to enlarge.

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The decline could just be a small blip that is soon reversed again. The most important feature to keep an eye on is the year-on-year growth rate of TMS-2, which has been declining since the end of the 'QE2'. This decline in the growth rate seems likely to continue in coming months in view of the 'taper'.

Conclusion:

The Fed continues to subtly tighten monetary policy, even though it is far from 'tight' – it is merely slightly less loose than it used to be. At some point the markets that have benefited the most from monetary pumping in recent years are likely to balk for more than just one day. Credit markets strike us as especially vulnerable to a potential set-up, specifically markets that offer such low returns by now that there is no margin of error left, and which have seen record issuance volumes, such as junk bonds (which are increasingly bereft of loan covenants protecting investors).

We have of course no idea at the moment what precisely will precipitate the next financial accident, but the more money supply growth slows down, the more likely such an accident will become. The precise trigger event doesn't really matter actually – once the time is ripe, any excuse will do.

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From Iraq to Ukraine: A Pattern of Disaster

by Justin Raimondo

Eleven years ago this week the United States invaded Iraq – an event the late General William E. Odom rightly called the biggest strategic disaster in US military history. The decade since that catastrophe proves one thing about US policymakers: they’ve changed their tactics without learning a thing.

Iraq today is a seething cauldron of religious and ethnic hatreds: a full-scale civil war is in progress, with Sunnis in open rebellion against the majority Shi’ites. As I write this, the latest news is that a car bomb exploding in Baghdad killed 19 people – in addition to another bomb north of the capital killing 2 and wounding 6. And that’s just in the past twenty-four hours: violence has escalated dramatically this year. The US is sending more arms to the government, including 100 Hellfire missiles – a government, by the way, that is staunchly pro-Iranian and which asked us politely but firmly to leave.

As George W. Bush would say: “Mission Accomplished!” But that’s only   if you’re Ahmed Chalabi, the “hero in error” who somehow persuaded   the Clinton and Bush administrations to put him on the CIA payroll and proceeded   to hornswoggle Western governments – and the complicit media – with tall tales of Iraq’s fabled-but-nonexistent nuclear weapons program.

Chalabi, it turned out, was working for Tehran – which naturally wanted its old enemy, Saddam Hussein, put out of commission so the Shi’ite majority could take power. A decade later and the leaders of Shi’ite parties who had found shelter in Tehran for decades rule the roost in Baghdad – thanks to the very same people who are now exhorting us to attack Iran. Yes, the neoconservatives whose policies led directly to the extension of Iranian influence throughout Iraq now insist the Iranian mullahs are building “weapons of mass destruction” and must be stopped.

Our enormous failure in Iraq exhausted us, not only financially but also morally and psychologically. Not that the war hawks of Washington were the least bit   deterred by their abysmal failure: it was the American people who began to wonder   if perhaps it hadn’t been worth the lives, the destruction of an entire country,   and the rise of militant anti-Americanism on a world scale. In reaction, ordinary   Americans became increasingly vocal about the need to stay out of the world’s   intractable conflicts and instead tend to business at home.

The political class didn’t pay much attention at first, only modifying their approach. Instead of simply invading, in the Bushian fashion, the strategy was to utilize proxies as a temporary expedient, while laying the groundwork for more direct overtly military intervention. Libya was supposed to be the model: this was preceded by a big propaganda campaign, in which our credulous mainstream media picked up the administration’s “imminent humanitarian disaster” talking point and ran with it. That the alleged site of this impending massacre of the rebels by Qadaffi’s men was supposed to have taken place in Benghazi underscores how and why this new strategy began backfiring from the start.

Libya began falling apart the moment we announced its “liberation,” and has gone rapidly downhill ever since. Yet the War Party achieved a nominal victory in that the scheme worked, after all. The Three Harpies of the Libyan Apocalypse – Hillary Clinton, Susan Rice, and Samantha Power – succeeded in dragging the President, not exactly kicking and screaming, into the Libyan mini-quagmire. If US troops weren’t bogged down fighting an insurgency, the administration soon found itself fending off a congressional insurgency around the attack on our “consulate” and the first assassination of an American ambassador in many years.

The same Three Harpies agitated for the aborted bombing of Syria, another “humanitarian” intervention on behalf of oppressed “moderate” Islamists. (Which is saying something when it comes to Syria, where Al Qaeda is now considered “moderate” compared to the ultra-radical ISIS.) Hillary was particularly interested in expanding the aid program which had so far only given the rebels light arms and political support. When the President vetoed stronger measures, she resigned – and although her resignation was long planned, there was a certain synchronicity in the timing.

So what or who pushed the President into the Syrian air strikes that never happened? I covered that in the run-up to the President’s announcement and his subsequent backing off in the face of popular outrage. Suffice to say here that once again the War Party had come up against what must inevitably be dubbed the “Iraq Syndrome,” after its predecessor, the “Vietnam Syndrome.”

This is the way our political class talks about the rumblings of rebellion that have occurred over the past half century or so, outbreaks of opposition to the idea of America as a world empire. Our elites view these periodic eruptions of “isolationism” as a psycho-ideological malady, which is where the Syndrome business comes into it.

Of course the real disease vector is in Washington, where the contagion of empire has unleashed an authoritarian plague eating away at the Constitution and the rule of law. A lawless regime of total surveillance has usurped the Fourth Amendment, and the bulwark of liberty, the Bill of Rights, is besieged in the name of “national security.”

It’s an old phrase with a new meaning: yesterday, which seems so long ago, “national security” meant the security of the nation, i.e. the territory of the United States. Today it means the “national interest,’ and our various and ever-changing “interests”  extend into every continent, every country, every godforsaken -and-best-forgotten corner of the globe.

Yesterday we were a country: today we are an empire, a fact our political elites   naturally glory in, but they face a major problem  –  the bigger the empire gets   the more opposition its existence arouses, at home as well as abroad. Empires   don’t come cheap, and the costs are ever-rising. In an age of austerity the   War Party has a harder sell.

One way around this is utilizing “soft power” to achieve US foreign policy objectives, and recent events in Ukraine are the first results of the War Party’s strategic shift. It is also, I might note, a geographic shift away from the Middle East, a pivot to Europe and Russia’s “near abroad” that underscores  –  and possibly prefigures  –  the Clintonian approach.

The first Clinton administration, you’ll recall, was focused on the anti-Slavic front, spending most of its foreign policy capital fighting a civilizational war against the Slavic Orthodox Russophiles of Serbia and Bosnia on behalf of the oppressed Muslim minority in the former Yugoslavia. This war will be resumed if and when the Clintons retake the White House; indeed, we are seeing the first stages of it unfold quite dramatically in the streets of Kiev.

Ukraine has been a longstanding battlefield in the on-again, off-again cold war with Vladimir Putin’s Russia, and one where the US has not always fared as well as it has more recently. The Orange Revolution, you might not remember, went sour pretty quickly, with the hero of the revolutionary hour, Viktor Yushchenko, quickly discredited and now largely forgotten.

Not to worry. Thanks to the infusion of untold millions into various NGOs and Ukrainian opposition groups, there are new “heroes of the Revolution” who have taken the stage in the Maiden – and taken power in Western Ukraine. No need to send in US troops: the muscle is provided by the black-masked cadre of “Right Sector,” football hooligans and neo-Nazi skinheads who wear the red-and-black insignia of the pro-Nazi Ukrainians who fought under SS command during World War II. Their fuehrer leader, Dmytro Yorash, is deputy chief of “national security,” i.e. the new regime’s political police.

With banker-technocrats like Arsenyi Yatsenyuk as inoffensive front man, the   real coup leaders in Kiev – a coalition of old-time oligarchs like Julia Tymoshenko and the “reformed’ neo-Nazis of the ultra-nationalist Svoboda party – are   setting the stage for a proxy war against the Russians. We have already seen   a series of low-level provocations, on the border and elsewhere, and now that    the referendum over Crimea has taken place a military clash is all too possible. As in the   case of the Syrian rebels, we’ll be providing aid to Ukraine – a cool $1 billion to start with – while our media shamelessly roots for the embattled “freedom-fighters.”

Yet there is a growing awareness – see here, here, and here – in “mainstream” quarters of the “interim” Ukrainian government’s creepiness. There really is no other word I can think of that describes a party which valorizes Stepan Bandera and the other founders of the Ukrainian SS unit that murdered 4,000 Jews in Lvov, and actively participated in the Holocaust. The Svoboda party, whose leader has denounced an alleged “Muscovite-Jewish” conspiracy against Ukraine, has no less than eight top posts in the coupist “government” in Kiev,  that is if you count the even more radical Yorash as a fellow traveler.

In short, the blowback from this foolhardy display of US-funded “soft power” could potentially rival what happened at Benghazi – if not worse. Do we really want to use a bunch of neo-Nazi skinheads as a battering ram against the Russians? In Libya, we unleashed Islamist fanatics who murdered our Ambassador. Do we know what we are unleashing in Ukraine?

The encirclement of Russia has been an ongoing project of post-cold war US   policymakers, with both Republican   and Democratic administrations doing their bit. However, Bill Clinton really   set the standard, not only with the Kosovo intervention but also in light of   his obsession with the former Soviet republics of Central Asia: Kazakhstan,   Azerbaijan, and the various ex-Soviet republics surrounding the Caspian Sea.   It was during the Clinton administration that the first shots of the new cold   war were fired.

Indeed, President Clinton set up a special office of Caspian Basin Energy Diplomacy and appointed Richard Morningstar as his Special Advisor and overseer of the new sub-agency. If the US could yank the ex-Soviet states in the region out of Russia’s “near abroad,” Western companies could reap mega-profits while the Russians were locked out – and Putin’s energy chokehold on Europe would be broken. The project was a classic case of crony capitalism and cynical geopolitics, with the US government canoodling with foreign dictators – some of them quite bizarre – in order to set up American and allied companies for the alleged coming “gold rush” in Caspian energy production.

Yet the eccentric dictators of Kazakhstan and Turkmenistan, for all their ruthlessness, come off as relatively benign compared to the gaggle of ultra-nationalists, open anti-Semites, corrupt oligarchs, and outright thugs (such as Yorash) who constitute the coup leadership in Kiev.

In Iraq we used “hard power” to install a regime that is not only tyrannical but also hostile to the US. Today in Ukraine we are deploying “soft power” to ensconce a government that will not only be a financial burden for as far as they eye can see, but which may also turn out not to be as “pro-American” as their effusive neocon cheerleaders would have us believe.

The Svoboda party claims to represent all Ukrainians in the region, and openly talks about a “Greater Ukraine” extending into parts of neighboring countries which may indeed have pockets of Ukrainians. The national-ethnic conflicts that have periodically transformed the map of south-central Europe go back a long way. Once this can of worms is opened there is no putting it back.

Quite aside from that, however, I thought I would never live to see the day when the US State Department whitewashed the neo-Nazi views and heritage of a gang of thugs who had seized power in a violent coup d’etat.

In Iraq, Libya, and Syria, US policymakers empowered radical Islamists of one sort or another. That was bad enough. Today, however, in Ukraine they are empowering the heirs of Adolf Hitler.

How is this not a scandal?

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China about to pick up speed, to the downside?

by Chris Kimble

CLICK ON CHART TO ENLARGE

Is a 30% decline for a currency in a couple of months, enough of a decline? The left chart reflects that the Chinese Yuan to the U.S. Dollar started falling two months ago and its been a hard and swift decline, to say the least. Do the currency players know something most of the world doesn't seem to know or is this just noise?

From a technical point of view, the Shanghai index is in a very vulnerable position in the right chart above. Should support break, this already weak index could get much weaker.

China represents one sixth of the worlds population. Some feel the Fed (Ben/Janet show) has been able to prop up the markets in the states. Can Janet keep things afloat in China too? Could weakness in China spill over into Europe and the United States markets and impact portfolio construction here? 

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